The impact of liquidity on senior credit index spreads during the subprime crisis

This paper examines the effects of liquidity during the 2007–09 crisis, focussing on the Senior Tranche of the CDX.NA.IG Index and on Moody's AAA Corporate Bond Index. It aims to understand whether the sharp increase in the credit spreads of these AAA-rated credit indices can be explained by worse credit fundamentals alone or whether it also reflects a lack of depth in the relevant markets, the scarcity of risk-capital, and the liquidity preference exhibited by investors. Using cointegration analysis and error correction models, the paper shows that during the crisis lower market and funding liquidity are important drivers of the increase in the credit spread of the AAA-rated structured product, whilst they are less significant in explaining credit spread changes for a portfolio of unstructured credit instruments. Looking at the experience of the subprime crisis, the study shows that when the conditions under which securitisation can work properly (liquidity, transparency and tradability) suddenly disappear, investors are left highly exposed to systemic risk.

Modelling risk perception and trust in food safety information within the theory of planned behaviour

This study suggests a statistical strategy for explaining how food purchasing intentions are influenced by different levels of risk perception and trust in food safety information. The modelling process is based on Ajzen's Theory of Planned Behaviour and includes trust and risk perception as additional explanatory factors. Interaction and endogeneity across these determinants is explored through a system of simultaneous equations, while the SPARTA equation is estimated through an ordered probit model. Furthermore, parameters are allowed to vary as a function of socio-demographic variables. The application explores chicken purchasing intentions both in a standard situation and conditional to an hypothetical salmonella scare. Data were collected through a nationally representative UK wide survey of 533 UK respondents in face-to-face, in-home interviews. Empirical findings show that interactions exist among the determinants of planned behaviour and socio-demographic variables improve the model's performance. Attitudes emerge as the key determinant of intention to purchase chicken, while trust in food safety information provided by media reduces the likelihood to purchase. (C) 2006 Elsevier Ltd. All rights reserved.

Neural correlates of cognitive dissonance and choice-induced preference change

According to many modern economic theories, actions simply reflect an individual's preferences, whereas a psychological phenomenon called “cognitive dissonance” claims that actions can also create preference. Cognitive dissonance theory states that after making a difficult choice between two equally preferred items, the act of rejecting a favorite item induces an uncomfortable feeling (cognitive dissonance), which in turn motivates individuals to change their preferences to match their prior decision (i.e., reducing preference for rejected items). Recently, however, Chen and Risen [Chen K, Risen J (2010) J Pers Soc Psychol 99:573–594] pointed out a serious methodological problem, which casts a doubt on the very existence of this choice-induced preference change as studied over the past 50 y. Here, using a proper control condition and two measures of preferences (self-report and brain activity), we found that the mere act of making a choice can change self-report preference as well as its neural representation (i.e., striatum activity), thus providing strong evidence for choice-induced preference change. Furthermore, our data indicate that the anterior cingulate cortex and dorsolateral prefrontal cortex tracked the degree of cognitive dissonance on a trial-by-trial basis. Our findings provide important insights into the neural basis of how actions can alter an individual's preferences.

Parametric preference functionals under risk in the gain domain: a Bayesian analysis

The performance of rank dependent preference functionals under risk is comprehensively evaluated using Bayesian model averaging. Model comparisons are made at three levels of heterogeneity plus three ways of linking deterministic and stochastic models: the differences in utilities, the differences in certainty equivalents and contextualutility. Overall, the"bestmodel", which is conditional on the form of heterogeneity is a form of Rank Dependent Utility or Prospect Theory that cap tures the majority of behaviour at both the representative agent and individual level. However, the curvature of the probability weighting function for many individuals is S-shaped, or ostensibly concave or convex rather than the inverse S-shape commonly employed. Also contextual utility is broadly supported across all levels of heterogeneity. Finally, the Priority Heuristic model, previously examined within a deterministic setting, is estimated within a stochastic framework, and allowing for endogenous thresholds does improve model performance although it does not compete well with the other specications considered.

A causal role for posterior medial prefrontal cortex in choice-induced preference change

After a person chooses between two items, preference for the chosen item will increase and preference for the unchosen item will decrease because of the choice made. In other words, we tend to justify or rationalize our past behavior by changing our attitude. This phenomenon of choice-induced preference change has been traditionally explained by cognitive dissonance theory. Choosing something that is disliked or not choosing something that is liked are both cognitively inconsistent, and in order to reduce this inconsistency, people tend to change their subsequently stated preference in accordance with their past choices. Previously, neuroimaging studies identified posterior medial frontal cortex (pMFC) as a key brain region involved in cognitive dissonance. However, it still remains unknown whether the pMFC plays a causal role in inducing preference change following cognitive dissonance. Here, we demonstrate that 25-min 1-Hz repetitive transcranial magnetic stimulation (TMS) applied over the pMFC significantly reduces choice-induced preference change compared to sham stimulation, or control stimulation over a different brain region, demonstrating a causal role for the pMFC.

Preference reversals for ambiguity aversion

This paper finds preference reversals in measurements of ambiguity aversion, even if psychological and informational circumstances are kept constant. The reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context-dependent weightings of attributes. We offer an explanation based on Sugden's random-reference theory, with different elicitation methods generating different random reference points. Then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion.

The three faces of bounded reliability: Alfred Chandler and the micro-foundations of management theory

Alfred Chandler, the celebrated business historian, provided detailed descriptions of the reasons for failed human commitments and the managerial tools needed to prevent/remediate such failings in the context of large business firms. Chandler's historical narrative identifies three distinct “faces” of bounded reliability—opportunism, benevolent preference reversal, and identity-based discordance—as the main drivers of commitment failure. Adopting bounded reliability (BRel) as a micro-foundation in management studies will raise the quality and relevance of scholarly recommendations to improve managerial decision making and action, because analysis of BRel challenges closely mirrors the real-world problems facing practicing managers.

Thinking about a limited future enhances the positivity of younger and older adults’ recall: support for socioemotional selectivity theory

Compared with younger adults, older adults have a relative preference to attend to and remember positive over negative information. This is known as the “positivity effect,” and researchers have typically evoked socioemotional selectivity theory to explain it. According to socioemotional selectivity theory, as people get older they begin to perceive their time left in life as more limited. These reduced time horizons prompt older adults to prioritize achieving emotional gratification and thus exhibit increased positivity in attention and recall. Although this is the most commonly cited explanation of the positivity effect, there is currently a lack of clear experimental evidence demonstrating a link between time horizons and positivity. The goal of the current research was to address this issue. In two separate experiments, we asked participants to complete a writing activity, which directed them to think of time as being either limited or expansive (Experiments 1 and 2) or did not orient them to think about time in a particular manner (Experiment 2). Participants were then shown a series of emotional pictures, which they subsequently tried to recall. Results from both studies showed that regardless of chronological age, thinking about a limited future enhanced the relative positivity of participants’ recall. Furthermore, the results of Experiment 2 showed that this effect was not driven by changes in mood. Thus, the fact that older adults’ recall is typically more positive than younger adults’ recall may index naturally shifting time horizons and goals with age.